The sub-custody model leverages expertise to increase assets and limit liability, providing an easy path to enable crypto assets as part of your portfolio offering
This past summer, the Office of the Comptroller of the Currency (OCC) provided guidance to banks and financial institutions making it clear that they could custody crypto assets. Since then, we’ve seen a flurry of investor interest in cryptocurrencies, which has only been driven higher by the growing list of corporations dedicating portions of their treasury to bitcoin. Just recently, on February 8th, an SEC filing revealed that Tesla bought $1.5 billion in bitcoin in January. Others include Square, MicroStrategy, Stone Ridge, Tudor Investment Corporation, SkyBridge Capital, and many more firms.
Institutions who choose to provide clients access to digital assets may have an advantage in maintaining those customer relationships, as well as increasing deposits from younger generations who are tech savvy and seek a higher yield environment.
However, a lack of custody infrastructure and the risk of liability is often a significant deterrent to institutions who would otherwise like to get in the game. To manage this risk, institutions must determine if they’re best suited to building an in-house custody solution, or partnering on sub-custody.
Building an in-house custody solution
Building your own custom custody solution to support digital assets can be complex, time consuming, and costly. Putting together the right building blocks for successful custody can easily be a multi-million dollar investment. It requires expertise across security and how to manage private keys, asset-specific compliance, and handling and storage of different types of assets including fiat currency, securities, and cryptocurrency.
To build crypto-specific custody in-house, you would need:
Appropriate regulated licenses
Crypto savvy: engineering, compliance, operations, and security
Wallet service tech or service provider (hot and cold storage)
Accounting and ledger system that supports up to 18 decimal places
Strong security across technology, physical hardware, and operational processes
Fiat transaction rails
Crypto-friendly banking sources
Rigorous compliance and auditing certification
Cryptocurrency transaction monitoring
Partnering with a regulated crypto expert
The sub-custody approach allows you to offer access to crypto in an efficient, cost effective and compliant manner. It leverages the expertise of a custody provider, giving you the benefit of established and trusted compliance and security best practices.
Sub-custody complements a financial institution’s existing custody model, supporting new functions where the custodian may not be licensed and expansion into new assets like cryptocurrencies.
What to look for in a quality sub-custodian
Banks and financial institutions require an easy and reliable sub-custody solution that can provide a pipeline to digital assets. There are many options out there, but not all of them are worth your time and resources.
This is what to look for from your sub-custodian:
1. Qualified custody certification
Qualified custodians are state and federally-regulated entities licensed to secure assets on behalf of clients and exercise fiduciary duties. They must adhere to all applicable custody rules and regulations, providing clients with trusted security measures.
2. Enterprise-grade, multi-layer security with multi-party computation (MPC)
Customer and investor funds are safe and secure from cyber attacks, internal collusion, and human error by MPC cryptography with hardware isolation.
3. Strong KYC and AML Policies & Procedures
A reliable compliance program should be driven by the Bank Secrecy Act to provide scalable KYC and AML across individuals and institutions. Custodians must leverage a wide range of data sources, watchlists, fraud databases, and document verification services to surface any potential point of risk.
4. Multi-asset support for crypto and digital currencies, fiat, and securities
Clients are provided access to a range of assets that can be easily and quickly settled within the custodian’s network, providing smooth on- and off-ramps for digital and fiat currencies.
5. A set of operational controls and procedures that cover all operational activities
Internal procedures are tested and updated to reflect new security and regulatory requirements. Dual controls in financial operations to audit sampling across the firm ensures that there is no single point of failure.
6. SOC reporting and auditing designation
External certification that a custodian’s system and organization controls (SOC) meet professional auditing standards to ensure that it adequately controls and regulates its customer data. The custodian is independently and transparently audited by an external firm.
7. ISO certification
The International Organization for Standardization (ISO) has deemed that the custodian meets all requirements for strong quality assurance and operational efficiency.
8. An insurance policy on custody account for additional protection against loss
Assets in storage and in transfer are covered by digital asset insurance, as well as a professional liability insurance policy (E&O) for added protection against potential internal loss.
Your sub-custody solution: Prime Trust’s API platform for digital assets
Your institution requires a robust security architecture that performs without jeopardizing operational efficiency for customers and trading teams. Prime Trust’s all-in-one financial infrastructure checks the boxes on not only sub-custody, but also easy, quick, and reliable deployment that allows institutions like yours to launch support for digital currencies.
Our proprietary core accounting system enables us to hold BTC, ETH, ERC20 tokens, stocks, bonds, real estate, and securities, supporting assets up to 18 decimal places. These assets can be custodied in a variety of account types including institutional, ROTH and traditional IRAs, asset protection trusts, and more. Prime Trust’s sub-custody solution is backed by SOC 1 and we are in the process of the ISO program implementation for 2021 certification.
Through PrimeCore, we offer both wallets that require manual signing as well as wallets with programmatic signing. Our smart contracts have all undergone independent security that audits in addition to our routine IT examinations and penetration testing.
Our custodial expertise is complemented by our partner, Fireblocks, who hold SOC 2 Type II certification. Prime Trust custody clients have access to Fireblocks’ MPC wallet-as-a-service, a battle-tested security platform to safely store and transfer digital assets. Fireblocks custody features the MPC-CMP algorithm, which increases transaction signing speeds up to eight times faster than other signing algorithms.
As an independent, qualified custodian, Prime Trust works with several stablecoin issuers, exchanges, OTC desks, and most crypto-focused companies that require custody and payment rails. Prime Trust is a Nevada state chartered trust company and provides the industry’s leading insurance policy with additional options also available.
Our PrimeCore API platform makes custody implementation simple. Learn more about Prime Trust’s sub-custody model.